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ONEOK, Inc. (OKE) Q3 2017 Earnings Conference Call Transcript

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Third Quarter 2017 ONEOK Earning's Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Andrew Ziola. Please go ahead, sir.

Andrew Ziola -- Vice President, Investor Relations

Thank you, and welcome to ONEOK's Third Quarter Earnings Conference Call. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward-looking statements or discussion of factors that could cause actual results to differ. Please refer to our SEC filings.

Our first speaker this morning is Terry Spencer, President and CEO of ONEOK. Terry?

Terry Spencer -- President and Chief Executive Officer

Thanks, Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued interest in investing in ONEOK. Joining me on today's call are Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs, and Kevin Burdick, Executive Vice President and Chief Operating Officer.

Before I hand the call over, I have a few brief opening remarks. I want to start out by saying how much I appreciate the efforts of our employees who personally endured Hurricane Harvey. Employees at our Mont Belvieu area facilities and countless others at our company worked tirelessly to keep our assets running safely in order to provide needed services to our customers. I am very proud of them and, as expected, their dedication and commitment to this company continues to be nothing short of remarkable.

I should also mention that the swift recovery of the Mont Belvieu infrastructure following Harvey would not have been possible without the hard work and cooperation of many of our industry peers, customers, service providers, and local governments. Many thanks to them.

I also want to extend our thoughts and prayers to the victims, their families, and all affected by the senseless tragedy that occurred in New York City yesterday afternoon. The city and its people will once again prove its courage and resolve as it copes with this tragic event.

Moving on to our third quarter performance, building off our second results, third quarter performance strong, benefiting from natural gas and natural gas liquids volume growth and higher transportation revenues in our natural gas pipeline segment. These results demonstrate that we are well on our way to achieving our 2017 guidance.

As we stand today, compared to a year ago, rig counts have increased in the states we serve by 70%, driven primarily by technological advances in drilling, which has made exploration more effective, more efficient, and production more prolific. We are seeing petrochemical facilities and ethane crackers come online and expect two more to start up in the next several months.

The industry has been anticipating these start-ups for several years and now we are beginning to see real demand for ethane, which Kevin will discuss more in a moment. We're also hearing from customers about the next wave of petrochemical facilities to be designed and built on the Gulf Coast. I mention this because it's important to point out that the energy industry is once again proving its resiliency and adaptability to the marketplace. I believe ONEOK has played a big part in that by continuing to invest capital to aggregate supply and deliver it to the markets. We are well positioned to meet the needs of our customers today and we are committed to continue investing in and around our assets to meet their needs into the future.

As noted in our earnings release, third quarter results included approximately $20 million in non-cash impairment charges related to nonstrategic assets and equity investments in our G&P segment, which impacted third quarter earnings per share by $0.03. We estimate that, without the disruption of Hurricane Harvey, the NGL segment's earnings would have been approximately $4.5 million higher for the quarter, or $0.01 per share.

Last week, we announced our quarterly dividend of 74.5 cents per share, or $2.98 per share on an annualized basis, unchanged from the previous quarter when we increased the dividend by 21%. Dividend coverage was a healthy 1.3x for the quarter. Management still expects to recommend annual dividend increases of approximately 9-11% beginning in 2018 and annual dividend coverage of 1.2x or greater.

Since June, we've announced nearly half a billion dollars in attractive, low multiple growth projects, supported by commitments from anchor customers. In September and October, we issued 3.3 million shares through our ATM equity program, resulting in net proceeds of $184 million.

The proceeds of these issuance, along with cash generated in excess of dividends support these recently announced high return projects as we prudently manage our balance. We continue to see opportunities to make attractive investments supported by customer commitments. To the extent that we make additional future investments, the ATM will be one of the tools available to fund future growth.

ONEOK's trailing 12-month gap debt to EBITDA improved again to 4.9x at September 30. Our annualized third-quarter gap debt to EBITDA run rate was 4.6x. We continue to expect leverage to be around our target of 4x or less by late 2018 or early 2019. We continue to proactively manage our balance sheet. We repaid $1 billion in outstanding debt in July and September combined and completed a $1.2 billion senior notes offering in July, essentially extending the term of the debt at a very attractive rate.

We are well positioned with ample liquidity to effectively manage our debt maturities and continue to finance growth investments. As it relates to the review of rates on West Texas LPG, in last September, the administrative law judge provided its finding to the Railroad Commission of Texas, which the commissioners may accept, modify, or remand for further proceedings. There is no deadline for them to take action, but we anticipate the commissioners may consider the findings and any exceptions filed by the parties this December.

Regardless of the outcome, we do not expect Railroad Commission's decision to have a material impact on our financial results. It will also not impact our current or future negotiated rates on West Texas LPG, nor will it hinder our ability to secure new NGL supply from producers and processors, as noted by our recent announcement to expand into the heart of the Delaware Basin.

In yesterday's earnings announcement, we maintained our 2017 guidance outlook, which was updated last quarter to reflect the completion of the ONEOK and ONEOK Partners merger transaction. We expect to announce 2018 guidance sometime after the first of the year. Please refer to our news release, investor presentation, and 10-Q filings for additional details on the quarter. I'll now turn the call over to Kevin for a closer look at each of our business segments.

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Thank you, Walt. Starting with our natural gas liquids segments, third quarter adjusted EBITDA increased 8% compared with the second quarter 2017, including the impact from Hurricane Harvey, which lowered our EBITDA by approximately $4.5 million. We sustained no significant damage to our facilities but experienced reduced volumes due to industry downtime and increased operating costs following the hurricane. We essentially realized no benefit from optimization directly related to the hurricane.

As we look forward, we have seen wider spreads so far early in the fourth quarter. NGL volumes gathered averaged approximately 812,000 barrels per day, a 5,000 barrel per day increase compared to the second quarter 2017. Higher Midcontinent volumes and higher volumes on our West Texas LPG Pipeline drove the increase. Volumes on our Bakken NGL Pipeline decreased slightly from the second quarter due primarily to plant maintenance activities at our Garden Creek and Grasslands Natural Gas processing plants in the Williston Basin and planned maintenance on the Overland Pass Pipeline.

As we discussed previously, our Bakken NGL Pipeline can run above its nameplate capacity of 135,00 barrels per day, and through October, volumes had returned to levels at or above what we experienced in the second quarter. We continue monitoring producer customer activity as well as the current utilization of Overland Pass Pipeline and are evaluating our options to provide additional capacity out of the region.

Third quarter NGL volumes fractionated were down slightly compared with the second quarter 2017, primarily impacted by Hurricane Harvey. Volumes that were unable to be fractionated during the third quarter were stored and will be fractionated in either the fourth quarter of 2017 or the first quarter 2018.

Ethane rejection levels on our NGL system remained relatively unchanged in the third quarter 2017, averaging more than 150,000 barrels per day, similar to second quarter levels. As multiple petrochemical facilities are expected to come online in the next few months, we continue to expect ethane recovery levels will fluctuate in the fourth quarter and into early 2018 as these start-ups occur.

As we have moved into the fourth quarter, we have seen a significant increase in our gathered volumes. In October, we exceeded 900,000 barrels per day on numerous days. The increase is a combination of volume growth from overall raw feed and additional ethane that is being recovered.

For the natural gas gather and processing segment, third quarter 2017 adjusted EBITDA increased 11% compared with the second quarter 2017. With the segment once again posting solid volume growth in the Williston Basin and STACK and SCOOP areas. In the Williston Basin, volumes processed again established new highs with an average of more than 840 million cubic feet per day during the quarter, despite planned maintenance at some of our processing facilities and the maintenance on Overland Pass Pipeline. Midcontinent volumes averaged more than 740 million cubic feet per day, and 8% increase compared with the second quarter 2017.

Rigs remained steady across our acreage with approximately 30 rigs operating on our dedicated acreage in the Williston Basin and approximately 15 rigs on our dedicated acreage in the STACK and SCOOP areas combined. In the Williston Basin, we connected 130 wells during the third quarter for a total of 313 through the first nine months of the year, well on our way to completing our target of 400 in 2017.

We now estimate that drilled but uncompleted wells on our dedicated acreage increased to between 350-400, compared with 300 previously. We continue hearing of improved efficiencies across the basin, including indications of between 10-15% productivity improvements in wells completed in 2017 compared with 2016. At current rig activity levels, in addition to duck inventories in the basin, we expect continued volume growth into 2018.

Growth in the Midcontinent continues as well. We connected 35 wells in the Midcontinent during the third quarter, and have connected 76 during the first nine months of the year, well on track to reach our target of 100 by the end of the year.

The segment's average fee rate was $0.86 per MMBtu in the third quarter 2017, compared with $0.76 per MMBtu in the third quarter of 2016, a 13% increase, which was driven primarily by increased volumes on contracts where we received higher fees. We still expect the segment's average fee rate to be approximately $0.85 for all of 2017.

In the natural gas pipeline segment, adjusted EBITDA increased 8% in the third quarter 2017 and 13% through the first nine months of the year compared with the same periods in 2016. The segment continues to benefit from higher fee-based earnings and increased transportation capacity contracted.

We continue discussions with producers and markets to develop long-term natural gas takeaway solutions across our footprint, especially out of the Permian Basin, where we have had a long-standing asset position with our West Tex Pipeline System and recently our joint venture Roadrunner Pipeline.

As Walt discussed, we've announced nearly half a billion dollars of capital growth projects, with the most recent being the $200 million expansion of the West Texas LPG Pipeline into the prolific Delaware Basin, one of the fastest growing plays in the US. The project is supported by long-term dedicated NGL production from two third-party natural gas processing plants, which we estimate will produce up to 40,000 barrels per day.

The project is expected to be completed in the third quarter of 2018. Fees on this project are negotiated bundled rates at market-based transportation and fractionation rates. Because this is an extension and expansion of an existing pipeline asset, we expect EBITDA multiples to be in the 4x-6x range, better than our typical 5x-7x. Additionally, the lateral is sized to allow for future growth beyond the initial two plants. We continue to discuss opportunities with numerous customers in the Delaware regarding potential contracts with more than ten new processing plants in the area.

Terry, that concludes my remarks.

Terry Spencer -- President and Chief Executive Officer

Thanks, Kevin. I have just a couple of closing comments as it relates to our future growth projects before we take your questions. Following the West Texas LPG expansion announcement, we still continue to develop our unannounced inventory of potential capital growth projects. We've updated that inventory, which is now between $2.5-3.5 billion compared with $1.5-2.5 billion previously. This inventory remains heavily focused on NGL infrastructure, which we anticipate could be announced between now and 2020. We are expanding our existing businesses and continuing to focus on deploying capital prudently at attractive returns and ways that will create value for our customers and investors.

Finally, I want to once again thank all of our employees for their continued hard work and their commitment to safe operations, our customers, and the communities we operate in.

...

Operator, we are now ready for questions.

Questions and Answers:

Hi. Good morning. Just a couple of questions. To start off, I was wondering if we could talk about your CapEx funding strategy going forward. You tapped the ATM this past quarter and I'm trying to understand. Is it more because you were during a blackout during the merger process and needed to get leverage and line posts closed and no longer expect to use it and use retained DCF? Or, alternatively, do you continue to plan on using the ATM as a primary source of funding?

Well, Shneur, there was no relation to the period of time between the announcement of the merger and the closing of the merger. It's important to note that we've announced these $500 million or so of new growth projects since June and we wanted to use the ATM to make sure that we funded those because they were in addition to the CapEx that we had previously been discussing. It was more of getting ahead of the game and making sure that, as we look at forward growth projects, we maintain a very strong balance sheet.

Shneur Gershuni -- UBS -- Analyst

Okay. And then, secondly, the $500 billion of identified CapEx for 2018, are there any other projects that you're very close to approving or moving forward with that could take the number up materially in 2018? Or, is that the run rate we should be thinking about?

Terry Spencer -- President and Chief Executive Officer

I think you should always think about that -- we've got this base run rate of routine growth, but we're continually working this backlog of new projects. As contractual commitments and anchor customers come together, certainly we'll go forward and take those projects to our board. We have a number of projects that are in various stages of development, and as those things mature, like we've always said, once we get those approved by our board, we'll certainly go public with those.

Shneur Gershuni -- UBS -- Analyst

Okay. Final question. You've had this forecast out there for dividend growth around the 10% range for several years going forward. How much capital do you need to be investing in to achieve that growth rate over the next couple of years? Is it a couple hundred million dollars? Is it more than you're running at? Less? Just kind of wondering what's the cadence to being able to achieve that growth rate, operating leverage versus needing to invest the capital.

Sure. The dividend growth rate that was previously announced was supported by base growth CapEx in line with the past couple of years. New projects enhance these cash flows and will produce more free cash flow to reinvest in our business and maintain our strong balance sheet.

Shneur Gershuni -- UBS -- Analyst

Great. Thank you very much.

Operator

[Operator Instructions] We'll take our next question from Jeremy Tonet with JP Morgan.

Jeremy Tonet -- JPMorgan -- Analyst

Good morning. Terry, I just wanted to pick up on one of your last comments with regards to the upsize in the growth project evaluation list, going up to $2.5-3.5 billion. I was wondering if you could provide a little bit more color on what specifically is driving that or what's changed? It sounds like the NGL pipeline is a part of the driver there, but is there any more you can share as far as what basins or anything else in the market that's evolved that you guys see as better opportunities now?

Terry Spencer -- President and Chief Executive Officer

Certainly, Jeremy, at a high level we're seeing core NGL growth in the basins that we operate. Certainly, in the Williston Basin, we continue to grow. The prospects, as Kevin mentioned on his call remarks, look great as we continue to see strong development in the STACK and SCOOP. This recent announcement in West Texas is an indicator of the opportunity that's in front of us there. The bulk of the CapEx -- this increased CapEx in this unannounced backlog is going to be in the NGL segment. It'll be in the form of pipeline loops, pumps, pipeline infrastructure, potentially fractionation capacity, and some storage in there possibly. Projects of that nature, primarily, is what that consists of. Kevin, do you have anything you could add to that?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

No. Just again, significant growth of our existing assets.

Jeremy Tonet--JPMorgan -- Analyst

That makes sense. Thanks. Another question on funding growth CapEx going forward, there's been an increased use of hybrid securities out there. How do you think those stack up versus the ATM when you're looking to minimize dilution for future growth?

Of course, we will look at every opportunity that we have to fund the business going forward. We're pleased to be in a position with a very strong investment grade balance sheet and traditional capital excess is something that we enjoy and will probably be where we would lean more toward. But, we'll stay on top and apprised of everything that's in the marketplace and evaluate whether it's a fit into our cap structure or not.

Jeremy Tonet--JPMorgan -- Analyst

Thanks. And then, just looking at the STACK and SCOOP, can you talk a little bit more about the dynamics there? It seems like STACK continues to have good opportunities moving forward with Canadian Valley and Knox seems like it's still on the back burner at this point. Can you share any more on what you see there?

Terry Spencer -- President and Chief Executive Officer

Kevin can help you there.

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Yeah. Again, we're excited about the STACK and SCOOP. Our volume growth sequential quarter-to-quarter just shows that and demonstrates some of the potential. On the G&P side, we do have the 200 million a day offload that we've got out there that's expected to be complete by the end of the year. That's the first drawing to capacity. Then, we've also got the Canadian Valley II expansion, which we've announced.

Beyond that, our NGL segment, with the footprint we've got in the STACK and the SCOOP there, there's a lot of other additional plants. I think EnLink just came out yesterday and announced a new plant that would be under our contract with them. So, a lot of activity going on in the STACK and SCOOP. Producers have come out here, just the last couple of calls I've seen, and talked about moving to the full development program, which just drives the efficiency of the rigs up. So, there is a lot of opportunity for us given our footprint in the STACK.

Jeremy Tonet--JPMorgan -- Analyst

Thanks for that, and just a last one on the Bakken, on the processing side there, can you update us on the competitive dynamics? You've seen some other MLPs moving forward with processing the expansion, such as Bear Den and others. Can you give us your latest thoughts there?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

With the volumes that we have seen in the Williston, we probably -- especially as we've moved into the fourth quarter and gotten past some of this maintenance -- have 125 million a day of capacity left. So, with the rig activity we're seeing and the well performance that we're seeing, clearly, we can see additional processing capacity that we would need.

Jeremy Tonet--JPMorgan -- Analyst

Thanks for that. That's it for me.

Operator

Our next question will come from Eric Genco with Citi.

Eric Genco -- Citi -- Analyst

Good morning. I was just wondering what you've been hearing from producer customers in the Williston heading into next year in terms of rig counts and activity. You're talking about 400 wells this year and 30 rigs, that seems like that's about 27 days to complete a well, which seems high. Do you expect the rig counts to taper off? And, if nothing changes, is 400 a conservative number going forward? How do you think about all of that?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

I may have some thoughts and Mike Fitzgibbons may have a couple of thoughts as well. Our conversations with the producer customers continue to be very positive. The rig counts have held in and we've seen some price strength here over the last few weeks. We see no indications that those rigs are going to back off. So, yes, if you maintain this activity level at 30 rigs, the 400 would be light as we think about 2018. Not ready to get out there with the guidance yet. We'll do that as we release our financial guidance. But clearly, you're right. The 27 is high, so we'd expect the well connects to go up in '18. Mike?

Mike Fitzgibbons--Vice President, Commercial

No, I agree with that. The only thing I'll add is we've had a couple of producers announce they can achieve their volume growth targets with less rigs because of the efficiency increases. So, we may see a rig or two drop, but we're still seeing very productive wells in our forecast in volume growth from those rigs.

Eric Genco -- Citi -- Analyst

Great. I'm curious, as you look out at the $485-495 million of projects since June, and $40 million of that is finished in 2017. The rest is overwhelmingly in '18. Do you expect your overall debt balance -- your net debt balance at quarter end was around $9.5 billion. Do you expect that to drop meaningfully or do you think it hangs in there or drifts up a little as you have the EBITDA growth that gets you to your leverage target?

I think, given the level of our CapEx, we'd expect to see deleveraging come more from the increase in the EBITDA than a drop in debt.

Eric Genco -- Citi -- Analyst

Alright. Thank you.

Operator

Our next question will come from Danilo Juvane with BMO Capital.

Danilo Juvane -- BMO Capital Markets -- Analyst

Good morning. I wanted to go back to 2017 guidance. The G&P segment specifically -- the wave. How strongly it has performed this year would imply a decline in 4Q just to get to the high end of the guidance range there. It seems that you're being a little bit conservative by not raising guidance, in my opinion. Are there any other offsets we should be thinking about, whether they be related to Harvey or maybe some of the ethane volumes you had baked into your forecast are going to be latent because of the outages in the Gulf Coast?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

No. Specific to your question about G&P, when you do that math, that's where you get to. But, the one dynamic that we always consider as we're thinking about the fourth quarter for gathering and processing is weather, especially when you look at the month of December. We do historically see a little bit of a pullback of our volumes, so we do factor that in. I don't think we see any lingering effects related to Harvey from our business. As we've talked about, we've seen transitioning a little bit, just overall, the volume growth we've seen in October in our NGL segment. Clearly, a decent chunk of that volume growth would be ethane, which would send the signal that the ethane recovery story is starting a little bit. That's how I would frame up how we're thinking about guidance, and still holding that firm.

Danilo Juvane -- BMO Capital Markets -- Analyst

Thanks for that. With respect to growth CapEx, I think the previous guidance was $500 million for the year? Thus far, we've paid $250 million. Should we expect the big chunk in 4Q here, or is that going to extend over into 2018?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Yeah, with the recent announcements, we're hot and heavy into the construction on those projects that we've announced. You would see that capital ramp up in Q4.

Danilo Juvane -- BMO Capital Markets -- Analyst

Thank you. Those are my questions.

Operator

Our next question will come from Brian Zarahn with Mizuho.

Brian Zarahn--Mizuho Securities -- Analyst

Good morning. On the West Texas expansion project, could you elaborate a bit on the volume assumptions on your 4x-6x multiple expectation?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Sure. If we think about the up to 40,000 barrels a day that goes in service on the back half of 2018, we would expect that volume to ramp up maybe over a year or two past the in-service date. Sheridan?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

Exactly right. Yeah, within two years, we should be at or above the 40,000.

Brian Zarahn--Mizuho Securities -- Analyst

Okay, so the 4x-6x multiple assumes around 40,000 barrels a day volume?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Yes.

Brian Zarahn--Mizuho Securities -- Analyst

Okay. On those new barrels, what type of fractionation opportunities are there potentially, or would those go to third parties?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Well, the 40,000 that we referenced in the press release -- we do have a bundle to service with them. We will be fracking those barrels. It's a total package deal for us. The pipeline does give us the opportunity to talk to more people and to bring more volume on that and fractionate it as well as at or below multiples that we'll see on this project.

Brian Zarahn--Mizuho Securities -- Analyst

Okay, so just to summarize. The 4x-6x multiple expectation assumes about 40,000 barrels a day of volumes, including fractionation fees.

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Yes.

Brian Zarahn--Mizuho Securities -- Analyst

Okay. That's helpful. Excess capacity -- how do you view the competitive landscape in the Permian for NGL takeaway to increase the utilization of the extension?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

Brian, this is Sheridan. It's a very competitive landscape out there, but as we've said before, with having an existing pipeline that we can incrementally add capacity to it to dial into what the customer actually needs, we can do it much cheaper and faster than other pipelines -- brand new pipelines that are coming in there. So, we see ourselves being very competitive. With this new expansion, we get us into a position that we can compete even better for these Delaware barrels. We have talked to multiple producers and processors out there, in the short term, before we announced this and after we announced this. We've even had more come to us and want to get on this pipeline and talk to us about it. So, we're very excited about what this brings to us and very excited about seeing more expansions come out.

Brian Zarahn--Mizuho Securities -- Analyst

So, stay tuned for updates on the extension. Obviously, a lot of focus on your organic opportunities. As we move into 2018, how do you view M&A playing a role in your growth?

Terry Spencer -- President and Chief Executive Officer

Certainly, in our thinking, we don't have any M&A factored in, but we're always going to be thinking about those opportunities and we've got a strong currency to work with. It's a financially sound company, but I can tell you our focus will be heavily organic and any M&A -- whether it's a bolt-on asset or something even broader from a strategic perspective -- will certainly just be an opportunistic approach. So, heavy organic will be the key strategy and key focus for 2018.

Brian Zarahn--Mizuho Securities -- Analyst

Thank you.

Operator

Our next question will come from Michael Blum with Wells Fargo.

Michael Blum -- Wells Fargo -- Analyst

Good morning. One more question on West Texas -- the new pipeline project. I think you mentioned you'll also be expanding the existing system? If that's correct, how much are you also expanding that by?

Terry Spencer -- President and Chief Executive Officer

Michael, we're expanding by the equivalent amount of 40,000.

Michael Blum -- Wells Fargo -- Analyst

Okay. Since the extension line is 110, as you move above that 40,000 on the extension line, does that imply that you'll have to then probably further expand the mainline? What are the capabilities to do that?

Terry Spencer -- President and Chief Executive Officer

Michael, you're exactly right. You'll have to continue to expand the mainline. We can expand and spend that capital on the mainline as we get the commitments on the lateral coming in there. We don't have to spend it all upfront. We can incrementalize that capital in there. As I said, we expect those projects that we're working on now to expand the mainline and bring more volume in on the lateral. We'll be in at or better than the 4x-6x that the original one is. We did put some upfront capital in there to put a bigger piece of pipe in the ground so that we are better able to compete in the Delaware.

Michael Blum -- Wells Fargo -- Analyst

On the cadence of dividend increases as you go out in time, are you planning to do a one dividend increase per year, or are you planning to do every quarter? What's the thought there?

Obviously, the board will address that on a quarterly basis, but our expectation would be to be in line with our past practice and most likely look at that quarterly. The board will evaluate the facts and circumstances each quarter and then act accordingly.

Michael Blum -- Wells Fargo -- Analyst

Thank you very much.

Operator

Our next question will come from Tom Abrams with Morgan Stanley.

Tom Abrams--Morgan Stanley -- Analyst

Thanks. G&P, strong margins in the quarter. Can you just break that down a little bit on how much you might attribute to NGL prices and spreads versus fees?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Yeah, we've converted so much of our -- through the contract restructuring, we've moved so much of the commodity exposure to fee. It's primarily fee. When you combine that with our hedge position for 2017, virtually all that is just volume growth with the fee increase.

Tom Abrams -- Morgan Stanley -- Analyst

Good. On the distribution, not so much for '18, but more for '19 -- just the philosophy around issuing equity to make a 10% or so distribution growth when you want to strengthen your balance sheet. Your capital spending is clearly very strong and the industry itself seems to be moving more toward that mid-single digit type being acceptable for the larger companies. I'm just wondering how you traded off those kinds of dynamics.

We're in the position today where, in this particular quarter, we covered the dividend by 1.3x and we expect to have significant dividend coverage going forward, which will give us a lot of excess cash flow to put back into the business and reinvest in the business. As I had said previously, the dividend growth that we had previously got it to was based on the run rate CapEx that we've been spending over the last couple of years. As we add these multiple projects, we just expect to have even more cash flow to invest in the business going forward.

Tom Abrams -- Morgan Stanley -- Analyst

Thanks a lot. Great quarter.

Operator

Our next question will come from Christine Cho with Barclays.

Christine Cho -- Barclays -- Analyst

Hi, I just have a couple of operational questions. The Bakken G&P volumes were up, but the NGL Pipeline volumes were down sequentially. What went on there? Was it just more ethane that was rejected versus last quarter?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Yes, Christine, that was primarily around ethane. It also relates to the maintenance activities that we saw at our assets and how we had to move gas around to continue to process as much of the gas as we possibly could. We did end up rejecting more ethane than we had the previous quarter.

In addition to that, another dynamic that was going on during the same time is our de-ethanizer at Stateline really ramped up during that time period. The NGLs produced actually went up, but the NGLs we were pushing down the pipe went down a little bit.

Christine Cho -- Barclays -- Analyst

So, if the NGL volumes were up, but the pipeline volumes were down, where did the incremental NGLs go? Do you guys have storage up there?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

No, again, it was primarily ethane that was rejected due to a lot of the maintenance and other activities that were going on. And then the ethane that's going through the de-ethanizer does end up in markets in Canada as well.

Christine Cho -- Barclays -- Analyst

Okay. In your prepared remarks, you alluded to evaluating opportunities for providing additional takeaway out of the Bakken. Your 10-Q says that you're expecting to add capacity to the Bakken NGL line by third quarter of next year. If you do that, don't you have to expand Overland Pass? I thought that was full? Or, are there other alternatives?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

Yes, as we are looking at the total system, both Overland Pass and Bakken Pipeline, to look at all alternatives to expand it. But, you are correct. Overland Pass is full. So, any expansion on the Bakken Pipeline will have to take into account takeaway from the bottom end. We're looking at all options to expand that system as we continue to see the robust growth in the Williston.

Christine Cho -- Barclays -- Analyst

And that would have to be looping, I'm assuming?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

There are a lot of different options there. It could be looping of the existing system or a completely new system.

Christine Cho -- Barclays -- Analyst

I see. Okay. With natural gas production increasing out of the Bakken, is the incremental residue gas still going down northern border? Or, do you guys have an idea of how much of the gas is going to AECO?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Physically, all of the gas out of the basin is virtually ending up on northern border that ends up in the Midcontinent -- the upper Midwest -- markets. So, how it gets priced, from an AECO perspective, is really a different question. But, all of the gas -- we're confident that, with the growth projects we see out there, we will continue to be able to move all of the residue out of the region on border.

Christine Cho -- Barclays -- Analyst

Great. Thank you.

Operator

Our next question will come from Ted Durbin with Goldman Sachs.

Ted Durbin -- Goldman Sachs -- Analyst

Good morning. I just wanted to verify -- I think your prepared remarks, you said your NGL gathering volumes were up to 900,000 barrels per day in October? Is that right?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

That's correct.

Ted Durbin -- Goldman Sachs -- Analyst

That's a big pick-up versus what you did in third quarter. What's the driver there and can you give us a breakdown of whether it's mostly Midcon or which regions that's coming out of?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Well, we're really seeing increase in all of our regions. We talked about the Bakken barrels being down and now we're back up to those levels before. Midcontinent volumes are up as well. A chunk of that is going to be ethane, as we have seen ethane recovery pick up during the month of October. We still think that will fluctuate a little bit as these new pet-chems come online and go through the start-up. But again, we've seen some nice volume growth out of all the areas.

Ted Durbin -- Goldman Sachs -- Analyst

Is it fair to say the margins on that additional will be in line with your rules of thumb, the $0.30, the $0.09, and the $0.03?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

Yeah, they will be close. Typically, we have a little bit of a breakdown for Ethane and a little bit of an incentive, but it's going to be materially in the line of what we've given. Remember, a lot of the ethane that's probably coming on is going to be a Belvieu based barrel coming out of the Midcontinent, which will be at a higher than the average rate that we have in our presentation. That has both Conway and Belvieu in it, and we talk about the Midcontinent. We'll probably be just slightly higher than that.

Kevin Burdick -- Executive Vice President and Chief Operating Officer

So, Sheridan, it's fair to say that in many of your contracts you have a tiered structure, a slightly lower transportation and frack rate for ethane versus your propane plus?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

That is exactly right. But, we expect the Belvieu barrels to come out first, which would be higher than the Conway priced barrels.

Ted Durbin -- Goldman Sachs -- Analyst

Great. That makes a lot of sense. Can you talk about the overall returns -- blended returns -- on the $500 million of growth CapEx you've announced since June. As we think about that bigger chunk -- the $2.5-3.5 billion -- what kind of EBITDA multiples should we think about for both of those buckets?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

I think you're going to see a lot of those projects in that unannounced backlog are going to be similar to the routine growth that we've seen historically. You could see a good chunk of this coming in at 4x-6x, but I think broadly speaking overall, some of the larger infrastructure projects that are in that mix are going to be in your 5x-7x that we've historically indicated. Does that help you?

Ted Durbin -- Goldman Sachs -- Analyst

Yeah, that's helpful. And then, the last one for me. Operating costs look like they're up a decent amount here in the third quarter year-over-year. Is it all just new assets? It sounds like there were some hurricane costs in there. Was this a good new run rate on up costs or is there any kind of one-time items in there?

Yeah, the up costs are really just more of our growth in dealing with that. Yes, there was a little bit in there for the hurricane, but every quarter, you typically will see some one-time attributes. It'll probably a decent run rate as we think about going forward.

Ted Durbin -- Goldman Sachs -- Analyst

Alright. That's it for me. Thank you.

Operator

And our next question will come from Craig Shere with Tuohy Brothers.

Craig Shere -- Tuohy Brothers -- Analyst

Good morning. October saw another, even larger, stairstep up in the Conway to Mont Belvieu basis divs. How sustainable do you see this, and could this trend, combined with your dividend coverage, mitigate the need to hit the ATM as more projects are announced?

Kevin Burdick -- Executive Vice President and Chief Operating Officer

Yes, you're right. We have seen an increase in spreads through the month of October. We do think there is some likelihood that those will maintain for two or three months, or beyond that. On the flipside, as our volumes do increase, that will reduce a little bit the amount of volume we can actually move on the pipes as we physically are flowing more volume on our assets. So, there is a little bit of a give and take there, but yes, it's nice to have that tailwind of the stronger spreads. Sheridan?

Sheridan Swords -- Senior Vice President, Natural Gas Liquid

Yeah, I definitely agree. You're very right. It's more this ethane we talked about and more volume growth. We will consume more of the pipeline for fee-based business and that will leave less capacity for optimization activities.

Craig Shere -- Tuohy Brothers -- Analyst

Understood. With respect with the $200 million West Texas LPG expansion -- I guess 160 at net to OKE -- I think three years ago, the guidance was given that you were hoping to achieve on the original acquisition and follow-on business, including maybe $500 million of expected growth CapEx, you're expecting to achieve an all-in 6x-8x multiple by the end of the decade. It seems like maybe the growth CapEx figure is coming well under the $500 million you all envisioned years ago. Do you see that due to efficiencies, but the EBITDA expectation would be intact? How do you see that multiple playing out over time?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

Craig, I still think we'll still reach that by the end of the decade as we go through -- especially, as we look at all the projects and plants we're looking at right now. We knew it would take us some time when we bought the assets to get our strategy in place because a lot of the plants that were coming on when we first bought the assets were already committed. So, we knew we had to wait for the second wave of gas plants being built that were not committed, and that's where we are right now. And, we're finding that we can very effectively compete for these gas plants. I still think that we will reach that 6x-8x by the end of the decade.

Craig Shere -- Tuohy Brothers -- Analyst

I was under the impression that the original guidance did not corporate any additional upside from associated fractionation. Does that continue to be the case? Does the 4x-6x for the $200 million project include or exclude related fractionation?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

Our fractionation system pulls from all across our assets and then we see growing through the whole thing. So, it all depends on when those fractionation capacities are needed. If we keep growing like this, as Terry mentioned, we will probably end up having to build more fractionation capacity and we'll see the Permian as being able to help support that growth and we will get market rates for that.

Craig Shere -- Tuohy Brothers -- Analyst

But, does that feed into the original multiple expectations for the West Texas acquisition you originally made?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

When we did that originally, the original was more based on pure tariffs and not the fractionation piece.

Craig Shere -- Tuohy Brothers -- Analyst

Okay. Thank you.

Operator

Our next question will come from Chris Sighinolfi with Jefferies.

Chris Sighinolfi -- Jefferies -- Analyst

Good morning, Terry. Bakken's done quite well this year. Obviously, the DAPL was sitting out there for a long time at a storied history to get in service, but now that it is and we're seeing clear book pricing at a premium, in your conversations with producer counterparts up there, how much is the pipeline being in place and the pricing dynamic, if at all, is shaping decisions and how long they see that evolving over time?

Terry Spencer -- President and Chief Executive Officer

With DAPL, anytime we can provide more pipeline takeaway capacity for crude, it benefits the producing from a reliability perspective and also just a netback perspective. We typically hear that their netbacks are maybe $2.00-3.00 better than they were before DAPL. That's just increased strength and helped their cash flow to fund more drilling. Certainly, operational reliability has to have improved significantly.

Mike Fitzgibbons -- Vice President, Commercial

Absolutely. You can look at some of the state data and rail has really taken a downward trend. Clearly, the pipe's going to be more reliable than rail.

Chris Sighinolfi -- Jefferies -- Analyst

Okay. For Sheridan, this is a question to which I'll plead ignorant. What is your expectation, or have you guys looked at, what happens with ethylene and polyethylene markets when we bring on this much seam cracking capacity in a narrow window of time? I'm blind to what happens further downstream, so can you help us think about the effects of that and what your pet-chem customers are saying and thinking about it, and if there's an opportunity for you to participate at all in that?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

What we hear from our customers on the polyethylene market -- I think these crackers are going to make ethylene, but you're already seeing these companies bring on ethylene to polyethylene units. So, you're really talking about where the ethylene is going. Worldwide, with the low cost of feedstocks we have in the United States, they're all saying the Gulf Coast crackers are much further to the left on the supply stack.

So, if we would overbuild and the world cannot consume that much polyethylene, you will see more the Naphtha crackers and Far East crackers being shut down -- maybe some European crackers -- a long time before you see the Gulf Coast crackers shut down. That's why you're seeing the next wave of crackers being talked about on the Gulf Coast. This is the most advantaged placed today to build crackers due to the cost of feedstocks.

Chris Sighinolfi -- Jefferies -- Analyst

The multi-year view, then, if I were to paraphrase it, is something similar to what we're seeing with other departments, where US markets -- simply because of advantaged cost structure, pushes out higher cost supply globally. So, we're basically going to make end roads via export. That's the expectation?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

That's right.

Chris Sighinolfi -- Jefferies -- Analyst

Are there particular foreign markets we could pay attention to, to get a sense from where that demand or supply competition's going to be most severe?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

I think, from a demand side, you're going to see the growth from China and India. We also see some from Latin America and maybe a little bit from Europe. But, China and India are going to be the big movers on the demand side. On the competition for supply, the only thing that's going to affect that is the gas to oil ratio. If you would see oil and gas on a BTU basis come back closer together and Naphtha would become more advantaged, you may see -- I would think we would see on supply.

It depends on how you look at supply competition. Obviously, we are exporting propane and ethane, which are going to crackers that would compete polyethene against our polyethene that's being produced in the United States. But, that's still pulling the hydrocarbon through our system and out of the United States.

Chris Sighinolfi -- Jefferies -- Analyst

Right. So, if we're seeing the next wave of pet-chem crackers at least talked about to be built domestically, it would seem like that community's making a determination that the facility better exists here than to export the ethane to whatever foreign market and crack it there? Is that fair, or is there something about the nature of all of this that I don't understand?

Sheridan Swords -- Senior Vice President, Natural Gas Liquids

I think it's a combination. Where we're seeing most of the people that want to export ethane for cracking, or even propane for cracking -- in India and China, I think they want to build their own facilities and get advantage of the cheap feedstock from the United States. The people that are building the next wave of crackers are the ones that built the first wave. They're going to be the ExxonMobil SABI cracker down at Corpus Christi that's been announced. All of the other people are also talking about when do they build their next cracker, and all of them are saying it's probably going to be in the Gulf Coast.

Chris Sighinolfi -- Jefferies -- Analyst

Okay, great. I appreciate it.

...

Operator

And that does conclude today's question and answer session. At this time, I will turn the conference back to management for any additional or closing remarks.

Andrew Ziola -- Vice President, Investor Relations

Okay. Thank you, everyone. Our quiet period for the fourth quarter starts when we close our books in early January and extends until earnings are released after the market closes in late February. Have a great rest of your day.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you all for your participation. You may now disconnect.

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